Prudential Pact Said To Be Near

By KURT EICHENWALD

Published: October 13, 1994

Prudential Securities will be compelled to acknowledge wrongdoing at the firm to avoid indictment on criminal fraud charges stemming from its sale of more than $8 billion worth of limited partnerships in the 1980's, people involved in the case said yesterday.

The acknowledgment will be contained in a document called a deferred prosecution agreement, under which Federal prosecutors will agree not to indict the firm on criminal charges for a period expected to be a year or more, these people said. During that time, Prudential would be operating under terms akin to voluntary probation. If it violated the law in a material way before the period ended, prosecutors could then elect to bring an indictment.

Prudential and Federal prosecutors in Manhattan are in the final stages of negotiating the agreement, and a deal is expected within weeks. At that point, prosecutors would file a criminal complaint in Federal court, outlining their allegations against the firm. The deferred prosecution agreement would be filed simultaneously. The complaint would not be an indictment, which involves formal charges handed up for trial by a grand jury, but rather would be a statement of allegations prosecutors believe they could prove if they took the case to trial.

In addition to acknowledging wrongdoing at the firm, the agreement with Federal prosecutors would require Prudential to waive any claims that future criminal charges are barred by statute of limitations or speedy trial rules. A number of other terms involving internal policing and reporting issues were also said to be on the negotiating table.

Still, the investigations of the scandal are not over. In recent weeks, the Securities and Exchange Commission stepped up its separate, civil inquiry of current and former executives, and new subpoenas seeking testimony and documents have been sent out. And prosecutors could still indict individuals on criminal charges, although some people involved in the case indicated that those criminal inquiries involving the partnerships would likely be suspended.

The deferred prosecution agreement is being worked out under a process known as a pretrial diversion. Under that process, both the prosecutor and the potential defendant appeal to a committee at the United States Attorney's office, asking that the filing of an indictment be postponed. In most such situations, a case is made as to why deferring an indictment would be just and would serve the public interest.

To this end, Prudential has aggressively argued that an indictment of the firm would be unfair. Most executives associated with the partnership debacle have left, and Prudential has said an indictment would unjustly harm the firm's 18,000 current employees, few of whom had any connection to the scandal.

In a joint statement, Prudential and its parent, the Prudential Insurance Company of America, said that the firm was "engaged in constructive discussions" with prosecutors regarding the partnership investigation. The statement added that Prudential Securities was not for sale. Spokesmen for both companies declined further comment.

Prudential Securities has been under criminal investigation for more than a year on allegations that it misled investors about the safety and potential returns of the firm's risky limited partnerships. About 340,000 investors purchased the partnerships in the 1980's, bringing Prudential hefty profits. But the partnerships collapsed, losing almost $5 billion in value.

Last year, Prudential settled civil fraud charges with Federal and state securities regulators, agreeing to compensate defrauded investors. The scandal's cost to the company, including legal fees, is now more than $1.1 billion.

While the agreement would sidestep a criminal indictment, it might raise other problems for the firm. Depending on the wording, a Prudential acknowledgment of wrongdoing in the agreement might be used against the firm as evidence in some of the thousands of civil lawsuits stemming from the partnership debacle, lawyers said.

Moreover, the resolution comes at a difficult time for any firm in the securities industry. The markets have been extremely rough this year, and Prudential's troubles have only made the situation worse for that firm. In the first eight months of the year, Prudential had a pretax loss of $320 million, or $186 million after taxes. About 1,100 of 5,000 brokers have left in the last year, most of them by joining competitors. Prudential has countered that exodus with an aggressive hiring and training program, leaving a net loss of only 129 brokers for the year, said Charles Perkins, a spokesman. As of June, the firm had $146 billion under management, he said.

The firm is also still undergoing changes in senior management. For example, J. Barron Clancy, who until June was the director of national sales, resigned last week, Prudential executives said yesterday. Mr. Clancy is a former member of the firm's Direct Investment Group, which packaged and sold the partnerships.